Imploding China Forbids Sale of Land
By Staff News & Analysis - March 26, 2010

The Ministry of Land and Resources has ordered a temporary ban on the sale of land for housing in a renewed measure to ease soaring real estate prices. Yun Xiaosu, vice-minister of land and resources, said local authorities should not sell land for residential purposes until this year's housing land supply plan is released in early April. "Residential land supply will increase and low-income housing projects will top local governments' agendas," Yun said during a video-conference on Monday. In his government work report early this month, Premier Wen Jiabao (left) said China will build 3 million housing units for low- income families and renovate 2.8 million shanty units with a total of 63.2 billion yuan ($9.25 billion) allocated this year, a year-on-year increase of about 15 percent. "The low-income houses and shanty units must be included in this year's land supply, while large-sized housing projects must be controlled in big cities," Yun said. – China Daily

Dominant Social Theme: Squeezing out price inflation?

Free-Market Analysis: This is a very interesting piece of news that is for some reason not apparently getting a great deal of play in the mainstream media, probably because it contradicts the power elite's dominant social theme that China is just like the West except richer and harder-working. The trend for China, at least as seen by the West, is seemingly ever-upward. But that may be, to a degree, anyway, coming to an end.

In fact, if a Western country, say Spain or Germany – or even the United States – had forbidden the buying and selling of land (even temporarily) in order to tame price inflation, chances are that such an action would receive widespread coverage and fairly broad condemnation. But let a country holding one sixth's of the world's population declare such a thing and there doesn't seem nearly the fuss that we would expect – or at least not yet anyway.

Maybe when we wake up tomorrow, this will be all over the press. (Is it?) But in any event the way China Daily presents the story, it is not meant to be a big a deal, merely one of a number of steps that China needs to take to keep down price inflation. But we would argue this is a fairly radical step and one that would indicate a fairly severe worry on the part of the Chinese leadership. When you forbid a billion-plus people from buying and selling land, you are making a big statement, seems to us. Here's some more from the article:

Yun emphasized that land used for low-income housing, for rebuilding shanty areas and for self- occupied small- or medium-sized houses must account for more than 70 percent of the overall supply this year. "The ministry encourages local governments in second and third tier cities to explore new policies and measures to curb the escalating housing prices," Yun said.

On March 11, the Ministry of Land and Resources issued a directive ordering developers to take a 50 percent down payment on all land put up for auction within one month of signing the contract, or they will lose the land along with their deposit. Shortly after the directive, the State-owned Assets Supervision and Administration Commission of the State Council ordered 78 central State-owned enterprises to quit the housing market on March 18.

Only China Ocean Shipping Company, China's largest group in modern logistics, said it will quit the sector within six months. On Monday, the administration said that the 78 companies must work out their quitting plans within 15 days. Since March, a five-month campaign across the country is under way to crack down on illegal land use and land hoarding.

Ah, the new terms – illegal land use and land hording! This is analogous in our opinion to the term "predatory lending" bandied about in the West and aimed especially at mortgage brokers in America who used high-pressure sales tactics to supposedly force individuals to buy expensive houses. The fault of course is with the monetary system itself, not the poor salespeople caught up in its inexorable tidal pull. But since the fiat-money/central banking mechanism that causes the problems in the first place cannot be mentioned, or identified as the culprit (for political reasons) the blame will passed onto actors in the affected sector.

We've pointed out regularly that the unrestrained printing of fiat money is inflationary and tends to set off great booms and busts in the economy. The inflation from the printed (and electronic) money transforms into price inflation over time as the money created by the central bank dribbles into the real economy. There is no way to tell what part of the economy that money will inflate first, but since central bankers have no effective gauge of how much is too much, it is pretty much a surety that the amount of money will eventually prove more than the economy can comfortably absorb, and a boom will ensure, inflation having taken place.

There have been arguments made by some Bell feed-backers that the Chinese economy could not be inflated because the Chinese used overseas money to create special commercial zones and sterilized foreign currency by now allowing banks to spend the yuan they received in return. But this overlooks the huge building program that China initiated internally and paid for in yuan, as well as many other yuan-based projects and services implemented by the Chinese. Additionally, China's recently trillion-yuan stimulus is contributing to the problem.

If sterilization actually worked, if central bankers were not actually profligate, if there were techniques in use to really "drain" money from the economy, then the Western world would not see the kind of inflation it regularly sees. In fact, central bankers are not filled with wise and judicious technocrats. Central banks are very blunt instruments. The result of a central bank, sooner or later, especially as they have been constructed today in the Western World, is first monetary inflation and then price inflation.

The Chinese can make it illegal to buy land, but this will do little or nothing, in our estimation, to reduce price inflation. The hallmark of a boom is rising prices, and that means excess money is already circulating in the economy. If the money is not to drive up land prices, it will drive prices up somewhere else. If the Chinese make it impossible to buy or sell anything at all domestically, the money will sit in people's houses, attics, basements and banks until there comes a time when it can be used. But it will be used, likely, so long as a boom psychology is at work.

The danger for the Chinese is that they are creating their very own bust by making it impossible for money to circulate domestically. When one gets to a point where the only way to control price inflation is by banning purchases then it is probably already too late. One can, perhaps, puncture the boom psychology, but the result is then inevitably a bust. Has China already started down this road? The mentality of a bust is likely more detrimental to leadership than a boom. The Chinese government has purchased social stability via a successful economy. But if the economy sours, the Chinese government will likely face a larger social stability problem.

The Chinese leaders are obviously terrified of inflation, and have stated as much, but driving the country's economy into a ditch is not likely to be a palatable alternative. Also, by taking such Draconian steps, the Chinese seem to reveal just how little progress the country has made at the upper echelons with a free-market orientation. A free-market has little to do with creating a money monopoly, then printing great gouts of money and finally when faced with an unraveling, trying to intimidate people holding the money, by calling them "hoarders" etc.

We've long written that the entire Chinese financial and industrial economy is, at the top level, a kind of metaphorical Potemkin village – a facade designed to create an impression of a free-marketplace. A Western false-front built of banks and industrial groups that make China appear to be a modern state. But the reality is different. The reality is one of brutal economic power – analogous to what is practiced in the EU or America, but even more primitive and blunt. It is the reality of one large central bank, a yuan-producing machine that, in conjunction with foreign industrial partners, created a titanic and relentless exporting mechanism. But now there is no place to export to. China must export internally and do so without provoking interior price inflation.

The Chinese people, having adapted to a time of relative plenty – and having seen enough of the outside world to shed, apparently, a collective inferiority complex – will not be easily assuaged if the economy collapses in on itself. Equally, if the level of material prosperity continues to go up, calls for a more open society will continue. There are all sorts of ethnic and regional tensions that have been ameliorated thus far by China's economic ascent. But both continued growth and a partial or full unraveling of such growth will work to pull China apart.

The power elite in the West, for a variety of reasons, has wanted to pretend that China is a "free-market" success story. But this dominant social theme is beginning to unravel, as we pointed out above. It will have a marked impact on the West's economic situation and just as importantly, it will reshape China's relationship with the rest of the world. When Japan imploded in the 1980s that nation merely subsided into a kind of quiet desperation, struggling with an overhang of debt and price inflation for some 30 years. We would predict that China's collapse, or unraveling, so far as it goes, will not be nearly so quiet nor private.

After Thoughts

China is only 50 years removed from pogroms and famine. The same leadership is still in charge. It is a most tough – and undemocratic – society. The instinct in such times is for an aggressive and desperate leadership to find an outside foe on which to concentrate people's minds and focus their frustrations. This would seem to us to be a process that China's leaders will adopt to the degree they can going forward. This indicates that China, having achieved some level or material success, will now face the world with a more truculent spirit, one bolstered by leaders trying to survive.

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